You can't make a bipartisan budget deal without throwing in a few budgetary gimmicks, and the landmark accord between congressional leaders and the White House developing this week includes a whopper. The US will raise cash by selling 58 million barrels of oil currently stashed in the Strategic Petroleum Reserve, even though oil prices have crashed recently.
Completely insane! Funding the government by selling ultra-cheap oil rather than borrowing at ultra-cheap rates https://t.co/FhhQcHjbGn
— Joseph Weisenthal (@TheStalwart) October 27, 2015
Selling low on oil seems like financial malpractice and subverts the purpose of the SPR. On the other hand, evaluating government policy as if it were a for-profit hedge fund will lead you in some weird directions, and it's far from clear that the SPR has much in the way of actual strategic value.
The government is a bad commodity trader
Privately owned physical stockpiles of oil are growing rapidly at the moment, due to technology-driven increases in production that have depressed global prices. In many cases, it's not cost-effective to actually shut down working oilfields, but with prices low it's not a great time to be selling oil either. Hence the growing interest in the physical storage game.
The main difficulty in making a profit here is that physically storing oil can get expensive.
But the US government, conveniently, already has the physical infrastructure for the SPR in place, and it could accommodate about 18 million more barrels of oil. The smart financial play, under the circumstances, would be to use the very low interest rates currently charged on US federal debt to buy up more oil to fill the SPR to the max. Then, when oil prices are higher, we could sell at a profit.
Government profits are accounting gimmicks anyway
While giving up on a potentially profitable commodities trade for the sake of an accounting gimmick would be a terrible idea for your business, it's not really that bad an idea for the federal government. That's because the whole idea of the federal government "earning profits" off its financial activities is a bit of a financial gimmick in the first place.
The federal government, after all, literally manufactures dollars, so turning profits is not that hard.
By the same token, since a US government default would cause dollars to become worthless, the US government can borrow dollars more cheaply than any other government or private business. That means the US government can basically always make money by borrowing money and then lending it to someone else. This is why federal loan guarantee programs score as profitable, and what gives rise to the movement for Fair Value Accounting that would register them as unprofitable in order to discourage their proliferation.
But however you do the accounting, the goal of policy should be to benefit the economy, not to make profits.
The SPR gimmick should help the economy
In economic terms, selling some oil and using the proceeds to finance an increase in government spending looks like a win.
Relieving sequester and giving businesses greater certainty will also help jobs and growth. pic.twitter.com/13dAabTeTE
— Jason Furman (@CEAChair) October 27, 2015
A higher level of short-term government spending is likely a good thing for an economy that continues to exhibit signs of serious labor market weakness. The White House Council of Economic Advisers expects, based on earlier calculations by the Congressional Budget Office, that the total higher spending in the budget package will create several hundred thousand jobs.
At the same time, selling down the SPR will make world oil prices very slightly lower, which would be a net plus for the American economy.
This is not a very "strategic" move
All that said, the reason it's called a strategic petroleum reserve is that the SPR was supposed to be a tool of geopolitics, not of budget making.
It was created in the mid-1970s in the wake of an oil embargo organized by Arab states with the goal of forcing Western countries to turn against Israel. The idea was that by stockpiling oil, the United States could make itself less vulnerable to economic blackmail by oil exporters. In the intervening decades, total breakdowns of political solidarity between major Middle Eastern countries, growing oil production in the United States and Canada, and a reduction in the importance of oil to the overall American economy have all transpired to make this "oil weapon" scenario wildly implausible.
In recent years, budget crises have been a much more acute problem for the United States than foreigner-induced energy supply crunches. There's a strong case, in other words, that what we really need is a Strategic Budget Gimmick Reserve to help bridge gaps in party priorities. Hundreds of millions of barrels of oil stored in containers near the Gulf of Mexico turn out to fit the bill pretty well.
